COVER FOR IRAN TRADE RESUMES

LONDON -- British, German and Italian corporations wanting to invest in Iran will once again be able to buy political risk insurance and export credit guarantees from government agencies.

Three of the largest European export credit agencies -- the U.K. Export Credit Guarantee Department, Germany's Hermes Kreditversicherung and Italy's Sezione Speciale per l'Assicurazione del Credito all'Esportazione, or SACE -- are restoring coverage for risks in Iran after a two- to four-year hiatus. The agencies withdrew coverage between 1994 and 1996 because of Iran's default on short-term debt payments and ongoing political tensions with the West.

* Improved political relations between Iran and the European Union following the 1997 election of the reformist government of president Mohamed Khatami.

* Iran's successful rescheduling of past debts owed to the agencies.

* Demand for coverage from European companies that want to take advantage of investment opportunities in Iran, especially in the oil, energy and infrastructure sectors.

Despite Iran's poor relations with Western countries since the 1979 Islamic revolution, private-sector insurers have continued to write Iranian political risk coverage, but with narrower terms. And they remain cautious about risks in Iran.

"There is still a lot of uncertainty in Iran when someone as important as the mayor of Tehran is sentenced to a lashing," said Geoffrey Lynch, head of political risk at Lloyd's of London syndicate 33, managed by Hiscox Ltd. The mayor of Iran's capital recently was sentenced to a prison term and flogging after his conviction for misusing campaign funds.

Syndicate 33 has received few inquiries from potential clients about political risk coverage to Iran, Mr. Lynch said.

But the state agencies are seeing lots of interest. "We have received a lot of inquiries from Italian companies. Many have been working in Iran without cover during this period," said Vicenzo d'Elia, area manager at SACE in Rome.

SACE is proposing to restore short-term, or 180-day, coverage for letters of credit guaranteed by Iranian banks. Medium-term insurance for investment projects will also be restored on a case-by-case basis, Mr. d'Elia said. "For this transaction to be approved, it must generate an income for the Italian system and develop the Iranian economy," he added. SACE's board was expected to consider the proposal late last week.

The Italian agency's coverage will be available to projects financed by a $1.2 billion credit facility to Iran granted by the Italian government and announced late last month. The credit, extended by Milan-based commercial bank Mediobanca, will be repaid by Iran over a 10-year period, said Italian Foreign Trade Minister Augusto Fantozzi.

SACE suspended coverage to Iran in January 1996, when Iran could not meet debt payments. At that time, SACE's exposure to Iran was 2.7 trillion lire ($1.78 billion). But the debt has been either paid or rescheduled and there have been no repeat problems since, Mr. d'Elia said.

The United Kingdom's Export Credit Guarantee Department late last month said it agreed to insure British goods exported to Iran on cash terms and to boost reinsurance capacity for exports sold on short terms of credit, or 180 days.

ECGD said in a statement that it had withdrawn coverage from Iran as a result of rising concerns about the country's ability to service its debts. "ECGD is not resuming cover for medium-term credits at the present time but will take a further look at the situation in due course, taking account of, among other things, the prevailing economic circumstances," the statement added.

An ECGD spokesman called the decision a first step toward normalizing relations. "We are not talking never for providing medium-term cover. The trouble is the fluctuation in oil prices. When they go down, the goal posts move," he added.

Iran receives 90% of its export earnings from oil sales. Because of low oil prices this year, Iran's export earnings are expected to fall.

Hanover, Germany-based Hermes Kreditversicherung also is restoring coverage to Iran. The German government did not formally suspend coverage, but Hermes had reached its predetermined exposure limit of 100 million deutsche marks ($56.4 million), said a Hermes spokesman.

"The government has now decided to reopen cover carefully on a case-by-case basis for short term. Cover for medium term is also available, but we will be looking strictly at the products," he added. All investment in Iran requesting Hermes insurance will be subject to approval by a government committee. This is not Hermes' usual practice, the spokesman said. Normally, the company decides what to insure up to a government-determined threshold.

France's state agency, Paris-based Coface, resumed writing credit risks in Iran in 1996. Coface suspended coverage in 1992 because of debt arrears, but these have been rescheduled, a Coface spokeswoman said. Coface provides cover for short-term trade, but only with a guarantee from an Iranian bank. It will also provide medium- and long-term coverage for French investors up to an exposure limit that Coface would not disclose.

European state political risk insurers began to restrict coverage to Iran in the early 1990s, when the country had accumulated as much as $30 billion in foreign debt, mostly in short-term liabilities.

Private-sector insurers, meanwhile, are seeing an increase in Iranian business. "Our portfolio on Iran is steadily growing, and there are a lot of opportunities, even though we apply some restrictions," said Simon Gibbon, head of country risk at London-based credit insurer Trade Indemnity P.L.C. "We are not typically looking at an open account, ever. Normally, we tend to cover at the letter of credit level," he added. Trade Indemnity does not plan to write coverage for periods exceeding 180 days, he said.

An "open account" refers to a project in which a foreign investor derives income but does not own assets. For example, the Iranian government is offering so-called "buyback contracts" that pay a fee to foreign oil and gas companies that restore Iranian-owned petroleum fields to production.

At a meeting in London early last month, an Iranian delegation announced $5.4 billion in buyback contracts to foreign oil and gas companies.

Hiscox's Mr. Lynch is not keen to insure an open account, though he has been approached by a number of oil companies about insuring these projects. "You are not talking about expropriation cover because you don't own anything to expropriate, and the Iranians hold all of the receipts from the projects," he said.

One problem for foreign investors is that the buyback program is contrary to the Iranian Constitution, said an official at the European Commission in Brussels, Belgium, who has been involved in developing E.U. relations with Iran. Article 81 of Iran's Constitution forbids foreign ownership of assets in the oil or gas sector, while Article 44 states that the public sector is predominant in the economy.

"This is a big problem. The buyback contracts are fine for the large companies that want to take the risk, but, when it comes to the crunch, the smaller companies will be hurt," the E.C. official said.

Oslo, Norway-based Saga Petroleum A/S is interested in investment opportunities in Iran, its senior executives say. But Norway's state credit insurer stopped offering coverage for Iran in 1988, and Saga is not considering political risk insurance. "We haven't purchased political risk insurance for many years. We usually make a higher demand on the returns of a project where the risks are high, and that remains our attitude," said Kaare Hagness, risk manager at Saga Petroleum.

Risk managers outside the petroleum industry remain circumspect about Iran. "I do not believe so strongly in such a huge change in the political situation in Iran, and I am skeptical that investments will increase there," said a risk manager for a large German engineering multinational who asked not to be identified.

"Even in the old Eastern Bloc countries, where there is inadequate legislation and no consumer protection, contracts are done under international business law. That is not the same in Iran," the risk manager added.

Norwegian companies are among the most interested in Iranian investment opportunities, but they are unable to obtain political risk insurance from the Norwegian state agency. The state agency, Garanti Institutet for Exportkredit, a division of the Norwegian Commerce Ministry, ceased writing coverage in September 1998 after the late Iranian leader Ayatollah Khomeini issued a death warrant on the British writer Salman Rushdie. The Norwegian publisher of Mr. Rushdie's book, "The Satanic Verses," was killed by Iranian terrorist.

Norwegian public opinion remains very opposed to investments in Iran, a situation similar to that in the United States, said Edvard Stang, deputy managing director of GIE.

U.S. corporations have been barred outright from doing business in Iran through an executive order in the 1990s. "U.S. companies are now suffering the worst of both worlds," said Rodman Bundy, a partner in the law firm Frere Cholmeley Bischoff in Paris. "They are precluded from investing in Iran under (President) Clinton's executive order, and now they see their European competitors taking those opportunities."

U.S. insurers are similarly unable to do business in Iran. When an insurer provides a global policy for a large non-U.S. multinational, it must exclude coverage from those countries sanctioned by the U.S. government. "We have had this issue with Iran, Iraq, Cuba, Burma," said Dan Riordan, head of political risk at Zurich-American Insurance Group in Washington.

However, U.S. companies are participating in major projects in countries bordering Iran, such as in the Caucasus and central Asia. If any project, such as a pipeline, crosses a border into Iran, then the U.S. investor in the project must ensure there are separate companies and have separate books for each side of a sanctioned border, Mr. Riordan said.

Despite some thawing of the relationship between Iran and the United States and calls from business and policy think tanks for an elimination of U.S. sanctions against Iran, Messrs. Riordan and Bundy both believe U.S. companies will be excluded from Iran for quite some time to come.